Vanguard small cap index fund tracking error

Tracking error is the ultimate measure of judging an index fund manager’s performance.

Since an index manager does not engage in security selection with an index fund, it is the manager’s transactional skill which distinguishes performance. How well the manager uses index futures, cross trading, block trading and manages trading around index reconstitution determines how close the manager can track the index benchmark. Vanguard, in its attempt to closely track index returns, states that it utilizes the following trading policies:

1. Rebalance each portfolio every business day to eliminate or reduce risk factor differences between funds and indexes.
2. Strive to be 100% invested at all times, using futures and ETFs to equitize cash for full investment, with no cash drag and no leverage.
3. Trade carefully, matching execution prices to fund share valuation.
4. Leverage cross-trading opportunities with Vanguard’s many other investment funds, reducing or eliminating commissions and transaction charges.
5. Maintain tight controls over commissions, bid-ask spreads, and market impact. For example, proprietary portfolio systems establish minimum trade sizes to control transaction costs.

Small Cap

Historical annual tracking error for investor and admiral shares.  The fund consistently exhibited positive annual tracking error when it was benchmarked to the Russell 2000 index.

Index changes:

• The fund changed index benchmarks from the MSCI 1750 Small Cap Index to the CRSP Small Cap Index on 1/31/2013.
• The fund changed index benchmarks from the Russell 2000 Index to the MSCI 1750 Small Cap Index on 5/16/2003.

Small Growth

Historical annual tracking error for investor and admiral shares.

Index changes:

• The fund changed benchmarks for the MSCI US Small Growth Index to the CRSP US Small Growth Index on 4/16/2013.
• The fund made a change of benchmark on 05/16/2003, moving from the S&P Small Cap 600/Barra Growth Index to the MSCI US Small Cap Growth Index.

Small Value

Historical annual tracking error for investor and admiral shares.

Index changes:

• The fund changed benchmarks from the MSCI US Small Cap Value Index to the CRSP US Small Cap Value Index on 04/16/2013.
•  The fund made a change of benchmark on 05/16/2003, moving from the S&P Small Cap 600/Barra Value Index to the MSCI US Small Cap Value Index.

Spreadsheets

• Small Cap index fund tracking error
• Small Cap Growth index fund tracking error
• Small Cap Value index fund tracking error

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